CRISIL 21st February 2011 PDF

Kirloskar Ferrous Industries Ltd
Initiating coverage
Enhancing investment decisions
Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process
Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental
grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The
valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to
grade 1 (strong downside from the CMP).
CRISIL
Fundamental Grade
Assessment
CRISIL
Valuation Grade
Assessment
5/5
Excellent fundamentals
5/5
Strong upside (>25% from CMP)
4/5
Superior fundamentals
4/5
Upside (10-25% from CMP)
3/5
Good fundamentals
3/5
Align (+-10% from CMP)
2/5
Moderate fundamentals
2/5
Downside (negative 10-25% from CMP)
1/5
Poor fundamentals
1/5
Strong downside (<-25% from CMP)
Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest
that can bias the grading recommendation of the company.
Disclaimer:
This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable by CRISIL
(Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for
any errors or omissions or for the results obtained from the use of Data / Report. The Data / Report are subject to change without
any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes
investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold
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Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be
reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or
published or copied in whole or in part, for any purpose.
Polaris Software Limited

Kirloskar
Business momentum
Ferrous
remains intact
Industries Ltd
Integrating backwards to move forward
Fundamental Grade
4/5 (Good
(Strong
fundamentals)
3/5
fundamentals)
Valuation Grade
5/5 (CMP has strong upside)
Industry
Information
technology
Auto Components
February 21, 2011

Fair Value Rs 42
CMP
Rs 25
CFV MATRIX
5
4
3
2
1
1
Poor
Fundamentals
Valuation Grade
Long-standing relationship with OEMs; castings volume up by 10.2%
Strong
Upside
Strong
Downside
Backward integration to lower costs as well as improve productivity

The planned backward integration of the pig iron manufacturing process by
setting up a sinter plant will lower KFILs iron ore cost by Rs 750-800 per
tonne. Also, the sinter plant is expected to improve productivity on account of
better-sized iron ore lumps (sinter) that will result in better processing of input
materials. CRISIL Equities expects sales volumes of pig iron to grow at a 6%
CAGR during FY10-FY13.
Excellent
Fundamentals
Fundamental Grade
Kirloskar Ferrous Industries Ltd (KFIL) manufactures pig iron and ferrous
castings (foundry). Castings are primarily used in commercial vehicles, tractors
and diesel engines. CRISIL Equities expects the company to benefit from
growth in the commercial vehicle sector. We assign KFIL a fundamental grade
of 3/5, indicating that its fundamentals are good relative to other listed
securities in India.
KFIL enjoys a long-standing relationship with OEMs for supply of castings and
also benefits from pig iron backward integration and a captive power plant in
Hospet. The industry is witnessing increasing demand and lower capacity
addition. KFILs Hospet plant is operating close to its full capacity. However,
the Solapur plant, which added capacity in 2008, is still operating at lower
capacity as casting designs are still in the approval stage from OEMs. We
expect volumes to grow 10.2% during FY10-13 as the operating rate of
Solapur plant improves to 85% from 39.5% in FY10.
KEY STOCK STATISTICS
In a cyclical industry, exposed to input cost fluctuations
Beta
1.45
Free float (%)
41%
End-user industries for both pig iron and castings such as automobiles and
tractors are highly susceptible to economic cycles, changes in interest rates
and varying demand patterns. KFIL is also exposed to fluctuations in prices of
key input materials such as iron ore and coke. Further, KFILs limited
bargaining power with OEMs restricts its ability to pass on the rise in costs.
Expect three-year revenue CAGR of 18%
We expect KFILs revenues to register a three-year CAGR of 18% to Rs 13 bn
in FY13 largely due to the 18% growth in pig iron revenues (which comprise
~54% of overall revenues) and 16.5% growth in casting revenues. PAT is
expected to grow at a three-year CAGR of 9% to Rs 640 mn.
NIFTY/ SENSEX
KIRLFER
Face value (Rs per share)
CRISIL Equities has used the EV/EBITDA method to value KFIL and arrived at a
fair value of Rs 42 per share. Considering the capital intensive nature of the
business, low bargaining power and volatility in raw material prices, we have
assigned EV/EBITDA of 3.5x.
KEY FORECAST
(Rs mn)
FY09
FY10
FY11E
FY12E
FY13E
Operating income
6,999
8,083
11,003
11,983
13,302
614
950
920
1,183
1,278
55
467
392
577
640
0.4
3.4
2.9
4.2
4.7
(83.8)
517.3
(20.0)
47.1
10.9
27.2
9.8
8.7
5.9
5.4
0.5
1.4
1.0
0.9
0.8
12.4
21.3
16.2
18.9
18.8
RoE(%)
1.9
15.0
11.5
15.3
15.1
EV/EBITDA (x)
2.6
4.7
3.2
2.4
1.6
EPS-Rs
EPS growth (%)
PE (x)
P/BV (x)
RoCE(%)
137.3
3432/76
Market cap (Rs mn)/(US$ mn)

Enterprise value (Rs mn)/(US$ mn)
3,329/74
52-week range (Rs) (H/L)
43/23
Avg daily volumes (30-days)
38077
Avg daily value (30-days) (Rs mn)
1.1
SHAREHOLDING PATTERN
100%
90%
80%
34.6%
34.1%
33.5%
33.5%
6.3%
6.8%
7.5%
7.5%
59.1%
59.1%
59.0%
59.0%
Mar-10
Jun-10
70%
60%
50%
30%
20%
10%
0%
Promoter
Adj Net income
Shares outstanding (mn)
40%
Valuations the current price has strong upside
EBITDA
5519/18438
BSE ticker
CMP: Current Market Price
FII
Sep-10
Dec-10
DII
Others
PERFORMANCE VIS--VIS MARKET

Returns
1-m
3-m
6-m
12-m
KFIL
-8%
-21%
-33%
-20%
NIFTY
-8%
-14%
0%
16%
ANALYTICAL CONTACT
Chetan Majithia (Head)
chetanmajithia@crisil.com
Nivedita Joshi
njoshi@crisil.com
Vishal Rampuria
vrampuria@crisil.com
Client servicing desk

+91 22 3342 3561
clientservicing@crisil.com
Sou rce: Com pan y, CR I SIL Equ it ies est im ate
CRISIL Equities | 1

Table: 1 Kirloskar Ferrous Industries Ltd: Business environment
Product/ Segment
Pig iron
Castings
Revenue contribution
53.8%
32.5%
57.5%
33.3%
Location of manufacturing
Manufacturing facility in Hospet,
Manufacturing facility in Hospet, Karnataka and Solapur,
facility
Karnataka
Maharashtra
Geographic presence
Caters to all regions except eastern India
(FY10)
Revenue contribution
(FY13)
Industry growth
Tractor industry to grow at CAGR of 9% over five years
expectations
Auto industry is expected to grow at CAGR of 15% over the next four to five years
Earth moving material handling industry to report 30% CAGR over next five years
Sales growth
12.9%
16.5%
18.1%
16.5%
(FY07-FY10 3-yr CAGR)

Sales forecast
(FY10-FY13 3-yr CAGR)
Demand drivers
The government's increased focus on agricultural sector and infrastructure development

Increasing rural income, increased focus on mechanisation of agriculture and ease in
availability of credit facility to farmers are the factors driving demand for tractors; strong
growth in the medium and heavy commercial vehicles industry
Indias position as a low-cost auto hub will enable India to gain sizeable market share in the
global auto components manufacturing industry
India is Asia's fourth largest exporter and expected to top the world in car volumes by 2050;
by then the number of vehicles on road will be 611 mn
Key competitors
Tata Metaliks, Sathavahana Ispat,
Tata Metaliks, Hinduja Foundries, Nelcast, Carnation
Visa Steel, Usha Ispat, Sesa Goa,
Industries, Simplex Castings, Nelcast, Magna Electro
Neco, Dempo, KISCO
Castings, Ghatge Patil, Amtek, Ashok Iron works
(Kudremukh), SLR Steel

Key risks
Economic slowdown can affect end-users (auto, tractor manufacturers) capex plans, which in
turn is likely to affect allied manufacturers like KFIL
Subject to volatility in raw material prices and foreign exchange as it imports 60% of its
coke requirements
Client concentration in castings business (M&Ms tractor segment)

Sou rce: Com pan y, CR I SIL Equ it ies
CRISIL Equities | 2

Grading Rationale
Rising demand for pig iron to benefit KFIL
CRISIL Research expects the demand for pig iron to grow at 10% CAGR over the
next two to three years on the back of strong growth in end-user industries such
as steel (CAGR of 11%, FY10-FY12) and auto (including the tractor segment,
which is expected to grow at CAGR of 15% over the next five years). Pig iron is
primarily used to manufacture castings, which are used to manufacture auto
components (engine parts, brakes, etc). KFIL supplies ~90% of its pig iron
The castings industry

accounts for nearly 6570% of pig iron
production, the balance
is consumed by the steelmaking industry
produce to local foundries (castings manufacturer) and local steel millers, and
the balance ~10% is consumed in-house (by its castings division).
Figure 1: Pig iron demand grows at 10% CAGR
Figure 2: Break-up of pig iron end-user demand
(in 000 tonnes)
Automobile,
21%
Others, 20%
6,500
5,500
4,500
Fans, 6%
3,500
2,500
4,632
4,909
5,202
6,294
5,722
Textiles, 9%
1,500
500
FY08
FY09
FY10
FY11E
Pipes &
fittings, 18%
Engines &
compressors,
11%
FY12E
Source: CRISIL Research
Pumps, 15%
Backward integration to cut costs

KFIL plans to incur a capex of Rs 850 mn to set up a sinter plant to lower pig
iron manufacturing costs. The sinter plant, which is expected to be operational
in 2QFY12, will enable the company to manufacture pig iron by utilising iron ore
fines instead of iron ore lumps which are more expensive. We expect sinter to
meet 60% of its iron ore requirement. The price differential between iron ore
To manufacture a tonne
of pig iron, 1.8-1.9
tonnes of iron ore lumps
are required
lumps and iron ore fines (after taking into account conversion cost of iron ore
fines to sinter/iron lumps) is Rs 750-800 per tonne. CRISIL Equities expects the
full benefit of the sinter plant in FY13 as the company ramps up its sinter plant
operations.
Iron ore
FY11E
FY12E
% of iron ore lumps
100%
54%
38%
Market price of iron ore lumps (Rs per tonne)
3,638
3,720
3,869
Market price of iron ore fines (Rs per tonne)

Blended cost (Rs per tonne)
FY13E
2,820
2,969
3,638
3,309
3,315
Cost saving (Rs mn)
411
554
% saving
11%
14%
CRISIL Equities | 3
and improve productivity

Backward integration is also likely to improve productivity. This is because the
size and shape of sinter creates efficient space in the mini blast furnace (MBF)
and increases production. Utilisation of sinter in the MBF is likely to increase per
day production by nearly 10-15% from 520 tonnes per day. CRISIL Equities
expects volumes to increase at a CAGR of 6% during FY10-13.
Figure 3: Pig iron volumes to grow at CAGR of 6% (FY10-FY13)

(in 000 tonnes)
300
250
200
150
100
213
227
234
FY10
FY11E
248
270
146
50
0
FY08
FY09
FY12E
FY13E
Source: CRISIL Equities

The change in process or material mix (usage of sinter) results in creation of
efficient space in the MBF, which increases productivity and leads to additional
cost benefits. This is because of better chemical reaction in the MBF and more
space to blow hot blasts (hot air). Efficient usage of hot blast enables reduction
in consumption of coke which is expensive. Expected reduction in coke
consumption is nine kgs per tonne of pig iron manufactured. CRISIL Equities
expects reduction in coke consumption to lead to cost savings of Rs 80-180 per
tonne.
KFIL has been continuously improving its manufacturing process to reduce
operational costs. Pig iron manufacturing is an energy-intensive process. To
60% of coke consumed
manufacture pig iron from iron ore lumps/fines, coke is burned as a fuel to heat
is imported, the balance
the furnace along with blasts of hot air. The temperature requirement is 1500
is sourced locally from
degree celsius. KFIL increased temperate in MBF from 700 degree celsius in
players like Gujarat NRE
FY07 to 1100 degree celsius in FY10 by replacing metallic gas heaters with
stoves. Additional energy released through stoves enabled the company to
reduce coke input/output ratio from 0.81 (800 kgs) in FY08 to 0.76 (~760 kgs)
in FY10.
Exposed to volatility in raw material costs

KFIL procures iron ore lumps for producing pig iron from the open market, which
exposes it to fluctuations in iron ore prices. The price fluctuation of another key
raw material coke also impacts the companys profitability. KFIL is largely
dependent on imports and, hence, is also exposed to volatility in foreign
CRISIL Equities | 4

exchange. However, timely hedging measures are taken by the company to
minimise exchange fluctuations. Increase in raw material prices is passed on
with a lag of two to three months. In the meantime, the demand-supply
scenario of raw material could change, impacting realisations and, hence,
profitability. This was the scenario in 2QFY11. KFIL was holding a high cost
inventory; however, a decline in input costs impacted realisations and, hence,
profitability.
Figure 4: Coke prices soared...
Figure 5: ... so did price of iron ore fines
(US$ per tonne)
200
320
180
160
300
140
280
120
100
260
80
240
60
40
220
20
200
Coke prices (China - Spot price)
Oct-11
High
Quarterly financials
(Rs mn)
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Net sales
2,812
1,769
2,059
2,583
2,246
Change (q-o-q)
80%
16%
25%
-13%
25%
EBITDA margin
15.7%
9.3%
9.3%
11.1%
5.1%
Adj PAT margin
9.1%
6.3%
4.4%
5.6%
1.6%
Power from waste heat meets 50% of its needs

KFIL uses waste heat gas generated during the production of pig iron to
generate power. This helps the company to lower the per unit cost of power by
Rs 4.3 as the cost of power generated through waste heat recovery comes to
around Rs 1 per unit, while the state grid power costs Rs 5.3 per unit. The
company has set up three steam turbines with combined cogeneration capacity
of 12 MW of power at its Hospet facility. Post installation of the sinter plant, the
5MW power capacity set
companys power requirements will go up by 2 MW to 18 MW at the Hospet
up in 2009 is entitled to
plant. The Solapur plant will continue to depend on state grid power, which is
carbon credits
expensive at Rs 6.3 per unit.
Power requirements (MW)

Plant-wise
Hospet
Solapur
Captive generation
State grid
Total
9.0
7.0
16.0
7.0
Total power consumed
7.0
23.0
CRISIL Equities | 5
Dec-11
Jun-11
Aug-11
Apr-11
Feb-11
Oct-10
Dec-10
Jun-10
Aug-10
Apr-10
Feb-10
Oct-09
Dec-09
Jun-09
Aug-09
Apr-09
Feb-09
Oct-08
Dec-08
Jun-08
Aug-08
Apr-08
Oct-10
Sep-10
Jul-10
Aug-10
Jun-10
Apr-10
May-10
Mar-10
Jan-10
Feb-10
Dec-09
Oct-09
Nov-09
Sep-09
Jul-09
Aug-09
Jun-09
Apr-09
May-09

The captive power capacity can satisfy 75% of the Hospet plants requirements;
however, it is not running at full capacity owing to limited access to waste gas.
Hence, KFIL sources about 44% of its power requirements from the state grid in
Hospet. After the commissioning of the sinter plant, the Hospet plants
dependence on state grid power will come down to 33% as the waste gas
generated in the sinter plant will also be utilised to generate power. Waste heat
utilisation will not only reduce dependence on the high-cost and erratic power
supply from the state grid but also take care of waste disposal. It will also entitle
the company to earn carbon credits whose sales are earnings accretive.
Currently, the company has not earned carbon credits but has registered itself
for carbon credit benefits, which are likely to accrue in the years to come.
CRISIL Equities has not factored in the benefits of the same owing to difficulty of
arriving at the carbon credits earned and realised (earned carbon credits can be
sold within three years, value is realised upon sale).
High LCV and MCV demand to boost casting sales

Castings manufactured by KFIL are mainly used in commercial vehicles (light
CV industry trails economic
and medium), tractors and diesel engines. KFIL derives 30% of its revenues
growth and handles more
from the castings business where it supplies its products to OEMs of light
than 50% of freight
commercial vehicles (LCM) and medium commercial vehicles (MCV). Production
movement domestically with
of commercial vehicles (CV) is expected to grow at 17% CAGR from FY10-FY15,
0.98 times correlation to
while the tractor industry is expected to grow at 9% CAGR during the same
aggregate GDP
period. Expanding economic activity and increasing passenger traffic are

expected to keep up sales of CVs. Robust growth in CVs and tractor industry
augurs well for KFILs castings revenue growth.
Figure 6: Strong growth in CV industry...
Figure 7: ... boosts KFILs castings volumes
(in 000)
(in 000 tonnes)
1,200
1,060
1,000
50
774
662
297
30
50
347
337
20
200
10
27
50
58
64
66
FY13E
458
483
468
FY12E
40
565
600
39
36
FY11E
FY10
FY09
FY08
FY15E
FY14E
FY13E
FY12E
FY11E
FY10
FY09
FY08
FY07
FY06
FY05
FY07
FY06
400
60
906
800
70
CRISIL Research expects LCV growth to be driven by the non-bulk segment

(includes consumer durables, express cargo, handsets, etc.), which is expected
to register a strong 10-12% growth over the next five years. CRISIL Equities
expects KFILs overall castings sales volumes to grow at CAGR of 10.2% over
the next three years on the back of strong growth in the commercial vehicles
industry and initiatives taken by the company to improve efficiency.
CRISIL Equities | 6

Investing further to improve operational efficiency
KFILs castings have faced high rejection rates in the past. To bring down the
rejection rate, KFIL began to focus on improving operational efficiency in this
business by adopting a new technology (such as replacing old moulding lines
with new semi-automated moulding lines). An automated process (less manual
work) reduces error, enhances efficiency and helps maintain consistency in the
Improvement in
product quality. Efforts to streamline the operations have made the business
manufacturing process to
profitable. To further bring down rejection rates in order to increase sales
aid volume growth at the
volume and thereby earnings, the company is investing Rs 150 mn to set up a
Hospet plant
fettling capacity unit (it gives high lustre and an even texture, which are critical
for ensuring that casting parts work properly) in the Hospet plant.
Compared to the Solapur plant, the Hospet plant relies more on manual
operations and relatively old technologies (old moulding lines). The plant (with
60,000 tonnes capacity) is also operating at optimum levels. Thus, to increase
sales volumes in the Hospet plant, KFIL is focused on bringing down rejection
rates.
Figure 8: Increased efficiency reduces total rejection rate

(Rejection rate)
16%
14.6%
14.5%
13.9%
14%
12.6%
11.5%
12%
10%
10.3%
10.5%
11.2%
10.4%
9.1%
11.0%
8%
7.6%
9.1%
7.9%
6%
6.8%
7.8%
7.6% 7.3%
8.2%
9.3%
6.8%
5.2%
4%
8.6%
4.8%
4.8%
4.5%
Hospet
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
FY10
FY09
FY08
FY07
FY06
2%
Solapur

In 2009, a new high pressure moulding line with latest technology was installed
in the Solapur plant. This has resulted in the plant operating with less man
power and overall increase in productivity. Apart from this, KFILs revenues
could get a boost as the Solapur plant has an additional advantage of machine
shop facility for producing machined castings as per customer requirements.
Reduced cycle time will

enhance Solapur plants
productivity by 10,000
tonnes per annum
KFIL is further focusing on better management of assets in Solapur to increase

volumes through increased order inflows. Hence, it is increasing the production
of moulds and cores - vital for castings manufacturing. The company plans to
quicken the process of the moulding line, whereby it will be able to process 100
moulds per hour instead of 80. With reduction in cycle time, the Solapur plants
productivity is expected to increase by 10,000 tonnes per annum. The move to
increase volumes by focusing on increasing efficiency will entail an investment of
Rs 250 mn.
CRISIL Equities | 7

Backward integration in castings business
KFIL has an integrated jobbing foundry castings manufactured with linkage to
molten (liquid metal) pig iron. As the company utilises molten metal (pig iron
manufactured in-house), it saves on power cost, which other foundries (who
purchase pig iron lumps and melt them) have to incur. Apart from cost savings,
integrated operations also led to product efficiency. Since the company uses
liquid metal to manufacture castings in the Hospet plant, its products require
less machining work at the customers end, unlike that of other foundry
manufacturers (castings manufactured using pig iron lumps). Machining is done
to give a product the desired efficiency. Minimal machine work indicates
efficiency of the product manufactured by KFIL on account of which it is a
preferred supplier of castings for critical parts like engine.
KFIL is one the few players that manufacture high-end castings (Hinduja
Foundries, Nelcast, DCM Engineering, etc.) used in the auto industry, especially
commercial vehicles light and medium and tractor segments.
KFIL is expected to
Long-standing relationship with OEMs

With its expertise in manufacturing castings, KFIL is continuously working on
developing cost-effective and efficient products. Owing to the companys ability
to customise the product as per clients requirements, it has become a preferred
supplier and is often considered as an integral part of an OEMs value chain.
KFIL enjoys a long-term and healthy relationship with major auto manufacturers
like Mahindra and Mahindra (commercial as well as tractor segments), Tata
benefit from the 17%

CAGR in commercial
vehicle auto industry as
it is a preferred supplier
of castings for engine
critical components
Motors, TAFE, Carraro, Toyota Kirloskar Motors Ltd, etc. The company is a single
source supplier to major auto manufacturers providing castings specifically for
engines, tractors and multi-utility vehicles.
Figure 9: Share of Mahindra (a key client of KFIL) in sales

50%
45%
40%
35%
30%
25%
48.9%
20%
48.8%
36.6%
15%
10%
5%
14.1%
18.3%
18.0%
0%
FY08
% of overall business
FY09
FY10
% of castings business
Mahindra and Mahindra

accounts for nearly 1520% of the companys
total sales and 50% of
the castings division
CRISIL Equities | 8

Auto manufactures on expansion spree: Auto manufacturers have lined up
new launches in the commercial vehicle segment. For example, Mahindra is
going to launch Navistar. Additionally, auto majors such as Daimler and Volvo
are expanding their scale to meet increasing demands for commercial vehicles
following an improvement in economic activity. The new launches and expected
robust growth in the CV industry augur well for KFILs revenue growth,
especially for the castings business, supported by established relationship with
OEMs.
but limited bargaining power

KFIL has established a healthy relationship with OEMs on account of its ability to
cater to clients requirements but has limited bargaining power. This is because
jobbing foundry (castings business) has low entry barriers as technology and
productivity are not thrust areas. Its a highly competitive market dominated by
unorganised players. Design capabilities, mould and core making facilities are
the characteristics that can create entry barriers. However, OEMs develop their
own designs, which are given to casting manufacturers who concentrate on
efficiency of the product manufactured. Since OEMs prefer to have multiple
vendors to reduce the supplier concentration risk, castings manufacturers have
to operate in a competitive environment (pricing as well as order booking).
Limited bargaining power restricts KFIL from entering into back-to-back
contracts and fluctuations in raw material prices are not fully covered. KFIL
receives monthly orders from OEMs to supply castings and pricing is determined
by taking into account the then prevailing raw material prices. However,
castings manufacturers hold inventory of three months in case of imported raw
materials like coke used in pig iron manufacturing. Any sharp movement in raw
material prices during the quarter impacts margins of players like KFIL. During
2QFY11, KFIL reported lower margins on account of a decline in prices of
imported inventory in hand. Castings manufacturers like KFIL are trying to
negotiate pricing contracts with OEMs to include any increase in input costs
which also includes additives, and processing cost of raw materials to get a full
cover against increase in input costs. The move is considered positive and the
company expects to get price increase from auto manufacturers.
CRISIL Equities | 9

Key risks
Exposed to cyclicality of end-user industries
End-user industries such as automobiles and tractors are highly susceptible to
economic cycles, changes in interest rates and varying demand patterns. The
first two can hamper the consumers ability to spend or result in postponement
of consumption. This has a negative impact on the business (revenues) of
industries like auto. Lower cash inflows impact the auto manufacturers capex
plans and, hence, demand for components. Poor monsoon could hamper
investment ability of farmers, which in turn will impact tractor sales volumes.
Exposed to fluctuation in input costs

KFIL procures iron ore from the open market for production of pig iron, which
exposes it to fluctuations in iron ore prices. The upcoming sinter plant will
enable the company to reduce cost of raw materials as the company will be able
The pig iron divisions
to replace high-cost iron ore lumps with iron ore fines. Note, iron ore fine prices
produce is largely sold
are relatively cheaper but linked to movement in iron ore prices. Thus, KFIL will
through a dealer-
be in a position to reduce cost but will remain exposed to volatility in iron ore
distributor network.
prices.
Commission paid is Rs
100-120 per tonne of
The other key raw material that has a significant bearing on the companys
profitability is coke. Of the total coke required to manufacture pig iron, 60% is
imported and the balance is sourced domestically. Since it imports a key input
material, KFIL is also exposed to volatility in foreign exchange. Increase in
material cost is normally passed on to end-users. Meanwhile, as the demand
outlook changes, realisations get impacted and affect profitability. A similar
scenario was witnessed in 1HFY11. KFIL had procured inventory at a high cost in
the beginning of the year. However, input prices declined and so did realisations
(pricing linked to input costs), which reduced profitability sharply during
1HFY11. The pig iron division is more susceptible to fluctuations in raw material
prices as the demand-supply scenario determines realisations and as there is no
chance to negotiate pricing as in the case of castings.
High rejection rate due to old technology in Hospet

KFILs castings plant in Hospet uses the old moulding technology which involves
more manual work compared to the semi-automated Solapur plant. The
company needs to cut down on manual errors to reduce its current 8-9%
rejection rate and increase volumes. Hence, it is planning to modernise the
Hospet plant with a fettling capacity, the benefits of which are likely to flow in
from FY12 onwards.
CRISIL Equities | 10
Financial Outlook
Growth across offerings
On the back of strong growth in the commercial vehicle industry and
productivity improvement, pig iron and castings divisions revenues are expected
to grow at CAGR 18.1% and 16.5%, respectively.
Figure10: Sales grow at two-year CAGR of ~18%

(Rs mn)
39%
100%
36%
14,000
Figure 11: Pig iron revenues grow at a faster rate
40%
12,000
90%
70%
15%
9%
8,000
11%
20%
30%
20%
-10%
2,000
8,083
11,003
11,983
-20%
FY09
FY10
FY11E
Revenues
FY12E
Y-o-Y growth (RHS)
(Rs mn)
22.9%
6,266
5,745
14.2%
4,342
3,684
3,532
9.1%
3,000
2,000
35%
4,500
30%
4,000
25%
3,500
20%
3,000
15%
2,500
10%
2,000
5%
1,500
0%
1,000
FY11E
FY12E
FY13E
FY09
FY10
FY11E
Revenues
FY12E
Investmen tcastings
Others
4,148
55.6%
3,817
65%
55%
3,398
45%
2,579
2,469
2,620
29.7%
35%
1,657
25%
12.3%
6.1%
8.7%
15%
5%
-4.3%
-5%
FY07
FY13E
% growth (RHS)
FY08
FY09
Revenues
Sharp movement
profitability
Castings
500
-10%
1,000
FY09
FY10
FY08
Figure 13:Volumes drive castings revenues
-5%
-4.1%
FY08
57.5%
(Rs mn)
7,158
6,000
4,000
56.0%
50.5%
32.3%
8,000
5,000
56.2%
50.7%
Pig iron
Figure 12: Pig iron revenue growth trend
22.1%
53.8%
32.5%
0%
FY13E
7,000
33.3%
35.3%
10%
13,302
FY08
34.1%
35.5%
50%
0%
4,000
6,999
33.2%
13.2%
0.6%
40%
-4%
7,285
9.1%
0.0%
0.8%
60%
10%
6,000
10.0%
0.0%
13.4%
80%
30%
10,000
10.6%
0.0%
13.1%
0.7%
FY10
FY11E
FY12E
FY13E
% growth (RHS)
in
input
costs
to
impact
Realisations or saleable price of pig iron and castings is vulnerable to any sharp
movement in raw material prices. However, there is a lag effect of at least a
PAT to grow at CAGR of

9% during FY10-FY13
quarter. During 1HFY11, KFIL was holding a high-cost coke inventory (about
US$ 510 per tonne) which declined to US$ 450 per tonne at the beginning of
2QFY11 and affected KFILs realisations. Since realisations are linked to spot
coke prices, KFIL witnessed a sharp decline in profits of nearly 50% in 2QFY11.
Coke prices have once again started moving up but this time KFIL is holding a
low-cost inventory and is likely to reap the benefits of the same.
In the recent past, profitability was impacted on account of rising raw material
prices and the economic slowdown that impacted growth in demand from enduser industries. However, KFIL could withstand the difficult situation on account
of timely measures (check on costs), long-standing relationship with OEMs,
which assured orders, with revival in demand and due to low gearing.
Figure 14: Margins vulnerable to raw material price movement

In FY09, margins
12.0%
dropped on account of
10.0%
high-cost inventory
along with rupee
8.0%
depreciation
6.0%
4.0%
2.0%
0.0%
FY08
FY09
FY10
FY11E
EBITDA margin
FY12E
FY13E
PAT margin
Source: Company, CRISIL Equities
Figure 15: RoCE and RoE to improve over a period of time

25%
Increase in productivity,
check on costs along with
20%
expected improvement in
realisations to result in
15%
higher RoE and RoCE.

10%
5%
0%
FY08
FY09
FY10
ROE
FY11E
FY12E
FY13E
ROCE

Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and business
prospects, and financial performance.
Experienced management
KFIL has an experienced management headed by Mr R. V. Gumaste, managing
director. Mr Gumaste, B.Tech in metallurgical engineering, joined KFIL in 1993
as chief of pig iron production. He has been associated with the group for nearly
30 years and with the company for more than 15 years. The promoters have
sound business knowledge and the independent directors also have in-depth
experience of more than two decades in similar lines of business. Strong
management set-up with domain expertise and group support enabled the
company turn around its operations in 2003.
Gradual increase in capacity

KFILs management has been quick in identifying new growth avenues and
capitalising on them. The company started operations with an installed capacity
of 120,000 tpa (tonnes per annum) of pig iron in 1994 and gradually increased it
to 360,000 tpa. It also increased its foundry capacity from 37,500 tpa in 1994 to
102,000 tpa today.
An experienced
management with a
belief in gradual and
steady growth
Professional set-up and a strong second line

KFILs management has adopted a professional approach towards management.
The company has inducted various professionals from the industry at the senior
and mid-management levels to prepare for the next level of growth. From the
annual reports, we understand that board members Mr Atul Chandrakant
Kirloskar and Mr Sanjay C. Kirloskar are from the promoter family, and are
professionals backed by strong business acumen.

Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors
such as industry and business prospects, and financial performance. In this
context, CRISIL Equities analyses the shareholding structure, board composition,
typical board processes, disclosure standards and related-party transactions.
Any qualifications by regulators or auditors also serve as useful inputs while
assessing a companys corporate governance.
Overall, corporate governance at KFIL meets the regulatory requirements
Corporate governance
supported by reasonably good board practices and an independent board.
practices conform to
regulatory norms
Board composition
KFILs board consists of eight members, of whom five are independent directors,
which meets the requirement under Clause 49 of SEBIs listing guidelines. The
directors have strong industry experience and are highly qualified. Most of the
directors are formidable names in their business lines. Given their background,
we believe the board is experienced. The independent directors have a fairly
good
understanding
of
the
companys business and
its processes.
The
attendance of directors in the board meetings has been fairly good showing their
interest in the company. The independent directors on the board are:
Mr A. R. Jamenis, who has been associated with Kirloskar Group for about
37 years. Prior to being an independent director, he served as MD of KFIL
(1998-2003).
Mr S. N. Inamdar is a leading advocate of the Bombay High Court and has

38 years of experience as an income tax consultant. He has also served as
the president of the Chamber of Income Tax Consultants.
Mr C. V. Tikekar has been on the companys board since 1993. He joined

the group after retiring from Tata Engineering Company Ltd (38 years
experience in various capacities such as chief metallurgist, in charge of
foundries, etc.) and played a vital role in the planning, installing and
commissioning of the plant in Hospet.
Mr S. G. Chitnis retired as vice chairman of Kirloskar Pneumatic Company

Ltd after turning it around in two years. He has over 38 years of experience
in manufacturing, research and development and marketing.
Mr A. N. Alawani has been associated with the Kirloskar Group for more than 30
years. Before joining KFIL (2006), he was a director-finance of Kirloskar Oil
Engines Ltd. Besides his core expertise in finance and taxation, he is well
experienced in import-export and labour matters.
Boards processes
The companys quality of disclosure can be considered good judged by the level
of information and details furnished in the annual report, websites and other
publicly available data. The company has all the necessary committees audit,
remuneration and investor grievance - in place to support corporate governance
practices. The audit committee is chaired by Mr Inamdar.

Valuation
Grade: 5/5
We have valued KFIL using the EV/EBITDA method and arrived at a fair value of
Rs 42 per share. Consequently, we initiate coverage on KFIL with a valuation
We assign a fair value of
grade of 5/5 indicating that the market price of Rs 25 per share has strong
Rs 42 per share and
upside from the current levels.
initiate coverage with a

valuation grade of 5/5
Considering the capital intensive nature of the business, low bargaining power
and volatility in raw material prices, we have assigned EV/EBITDA of 3.5x.
One-year forward P/E band
One-year forward EV/EBITDA band
(Rs)
(Rs mn)
120
14,000
100
12,000
10,000
80
8,000
60
6,000
40
KFIL
4x
8x
16x
2x
4x
P/E premium / discount to NIFTY
P/E movement
Feb-11
Jul-10
5x
Nov-10
Apr-10
Oct-09
Jan-10
Jun-09
Mar-09
Dec-08
Aug-08
Feb-08
May-08
Jul-07
EV
Nov-07
Apr-07
Jan-07
Jun-06
Feb-11
Jul-10
14x
Nov-10
Apr-10
Oct-09
12x
Jan-10
Jun-09
Mar-09
Dec-08
Aug-08
Feb-08
May-08
Jul-07
Nov-07
Jan-07
Apr-07
6x
120
400%
350%
100
300%
80
250%
200%
60
150%
+1 std dev
40
100%
20
50%
0%
0
-1 std dev
-50%
Median
1yr Fwd PE (x)
Median PE
Feb-11
Nov-10
Jul-10
Jan-10
Oct-09
Jun-09
Mar-09
Dec-08
Aug-08
May-08
Feb-08
Nov-07
Jul-07
Apr-07
Jan-07
Jun-06
Feb-11
Nov-10
Jul-10
Apr-10
Jan-10
Oct-09
Jun-09
Mar-09
Dec-08
Aug-08
May-08
Feb-08
Nov-07
Jul-07
Apr-07
Jan-07
Sep-06
Jun-06
Premium/Discount to NIFTY
Sep-06
-20
-100%
Apr-10
Jun-06
Sep-06
2,000
Sep-06
4,000
20
Peer comparison
Mcap (Rs mn) as on Feb 21, 2011
EBITDA margin (%)
KFIL
3,432
Hinduja Foundries Ltd.
2,460
Carnation Industries Ltd.
60
Magna Electro Castings Ltd.
332
Nelcast Ltd.
1,480
Simplex Castings Ltd.
515
Sathavahana Ispat Ltd.
1,570
Net margin (%)
FY08
KFIL
6.7% 1.1% 6.1%
FY09 FY10 9MFY11

3.4%
KFIL
Hinduja Foundries Ltd
Carnation Industries Ltd
FY08
FY09
FY10
9MFY11
10.8%
8.8%
11.8%
8.1%
10.6%
7.8%
13.9%
10.7%
3.9%
7.2%
6.7%
-8.4%
Magna Electro Castings Ltd
19.9%
13.4%
25.6%
24.2%
Nelcast Ltd
13.3%
10.5%
9.3%
6.3%
Simplex Castings Ltd
11.3%
12.8%
14.4%
15.1%
Sathavahana Ispat Ltd
21.7%
10.6%
16.3%
16.0%
RoE (%)
FY08
FY09
FY10
10.8%
8.8%
11.8%
11.3%
-5.7%
-0.3%
-2.0%
3.7%
-1.1%
21.1%
7.5%
15.3%
Nelcast Ltd
26.5%
2.5%
4.4%
KFIL
3.2% -2.9%
0.1%
1.4%
0.0%
0.8%
1.0%
-8.3%
6.8%
1.8%
7.5%
7.7%
Nelcast Ltd
6.4%
1.2%
2.0%
23.4%
3.9%
4.5%
5.7%
6.4%
19.6%
21.0%
20.5%
8.3%
2.3%
6.2%
8.0%
27.1%
8.7%
13.3%
EV/EBITDA
FY08
FY09
FY10
KFIL
6.7
2.6
4.7
Hinduja Foundries Ltd.
8.8
13.7
10.6
Carnation Industries Ltd.
11.1
6.5
6.5
Magna Electro Castings Ltd.
5.5
3.1
5.4
Nelcast Ltd.
5.5
13.5
18.8
Simplex Castings Ltd.
5.1
2.8
4.7
Sathavahana Ispat Ltd.
3.8
2.5
8.1
Sou rce: CR ISIL Equ it ies

Company Overview
Incorporated in 1991, a Kirloskar Group company, KFIL is promoted by Kirloskar
Oil Engines Ltd and Shivaji Works Ltd. It manufactures pig iron and ferrous
castings (foundry). Pig iron is primarily used by automobiles, tractors, textiles,
pump, diesel engine industries and secondary steel mills. Only 10-12% of pig
iron manufactured is used in-house to manufacture castings, which are used in
automobiles, tractors, diesel engines and locomotive industries.
KFIL entered into a one-time settlement with financial institutions for the
repayment of high-cost loans in 2003 as a part of the debt restructuring
programme. A strong management along with domain expertise and group
support enabled the company turn around its operations. The accumulated
losses were completely wiped out in 2007. It declared its maiden dividend in
2008 and since then has been consistently paying dividends.
Contribution to revenues
Business segments
FY08
FY09
FY10
Pig iron
50.7%
50.5%
53.8%
Castings (foundry)
35.5%
35.3%
32.5%
Product details and customer profile

Business segment
Product type
Key customers
Castings
Cylinder blocks
Auto: Mahindra & Mahindra Ltd, Tata Motors Ltd, Toyota Kirloskar Auto Parts, Eicher
(Grey iron, SG iron)
Cylinder heads
Motors Ltd
Housings
Tractor: Mahindra & Mahindra Ltd, Escorts Ltd, Carraro India Pvt. Ltd, TAFE
Auto parts
Engine: Kirloskar Oil Engines Ltd, Simpson & Co. Ltd
Foundry grade
Electro Steel Castings, Texmo Industries, Rajkot Eng. Association, Laxmi Machine
Basic grade
Works, Punjab Tractors Ltd, Sriram Piston & Rings Ltd, Kapilansh Dhatu Udyog Ltd,
SG grade
Ghatge Patil Industries Ltd, Prashant Castings Ltd, Indo Shell Mould Ltd
Pig iron
Manufacturing facility
The companys manufacturing facilities are located in Hospet, Karnataka and
Solapur, Maharashtra; they have a combined capacity of 360,000 tonnes per
annum (tpa) of pig iron and 102,000 tpa of castings. It also has three steam
turbines with a combined capacity of 12 MW. In FY10, KFIL installed stoves for
mini blast furnace-2 to increase productivity and reduce coke consumption.
During the last fiscal year, the company installed a high pressure moulding line
in order to improve the technology for its castings plant in Solapur. The
operations of the foundry in Solapur (based on old technology) have been
reduced and will be completely phased out in FY11 in line with KFILs plans to
transition to new technology for manufacturing castings. The company has
decided to close down the investment castings division, which contributed
merely 1% to total revenues.
Details of installed capacities and utilisation rate

Installed capacity (MT)
Segment
2008
Pig iron
Castings
2009
Capacity utilisation rate
2010
2008
2009
2010
240,000
240,000
360,000
108.3%
78.9%
75.9%
84,000
112,000
102,000
60.9%
37.5%
51.8%
Future plans
KFIL has planned a capital expenditure of Rs 2 bn to increase the high-margin
castings divisions manufacturing capacity by 90,000 tpa by the beginning of
FY13 to cater to rising demand from the automobile and tractor sectors. The
two-phased expansion will be primarily funded through internal accruals and the
company will resort to external funding only if necessary. We have not factored
in the capex plan as the funding is not yet finalised. KFIL is looking to fund its
expansion plans by exercising one of the three options:
Internal accruals: With increase in realisations, cash flows are expected to

increase that could part-fund capex plans.
Warrant conversion: Promoters hold 60% stake in the company and are
willing to pump in more funds through warrant conversions to increase
capacity.
Borrowings: Being near debt-free leaves room to increase the gearing. However,
as a group policy, KFIL prefers to fund capex through internal accruals and
warrant conversion.
Milestones
1991
Incorporated as Kirloskar Ferrous Industries Ltd
1994
Commissioned mini blast furnace-I and 3.5 MW power plant-1, using blast furnace gas
1995
Commissioned foundry and installed mini blast furnace-2
1997
Installed another 3.5 MW power plant
2003
Turnaround year
Entered into one-time settlement with financial institutions for the repayment of high-cost loans
Raised Rs 2.27 bn through rights issue: Equity share of Rs 5 at a premium of Rs 30
Acquisition of Solapur plant from Kirloskar Oil Engines Ltd
Commissioned hot blast stoves project for mini blast furnace -1
2007
2008
Declared maiden dividend of 15%
2009
Awarded certificate of merit by the Ministry of Power
New moulding line was set up at Solapur plant at an investment of ~ Rs 1,095 mn.
2010
Commissioned new turbo blower for increased power generation

Commissioned hot blast stoves for mini blast furnace II

Annexure: Financials
Income statement
(Rs mn)
Operating income
EBITDA
EBITDA margin
Balance Sheet
FY09
6,999
FY10
8,083
FY11E
FY12E
FY13E
11,003
11,983
13,302
1,183
1,278
614
950
920
8.8%
11.8%
8.4%
9.9%
9.6%
(Rs mn)
FY09
Equity share capital

Reserves
Depreciation
230
260
301
329
340
Minorities
EBIT
383
691
619
855
938
Net worth
686
686
686
686
2,878
3,316
3,803
2,973
3,266
3,564
4,003
4,489
222
14
44
81
80
C onvertible debt
677
575
773
858
Other debt
189
20
2
23
PBT
190
Tax provision
Minority interest
PAT (Reported)
79
491
Less: Exceptionals
24
23
Adjusted PAT
55
467
63
753
743
733
189
63
753
743
734
315
319
319
319
319
3,477
3,648
4,636
5,065
5,542
2,633
2,796
3,195
3,467
3,327
662
584
584
584
584
3,295
3,380
3,779
4,051
3,911
Inventory
577
1,427
1,357
1,477
1,640
Sundry debtors
692
889
1,245
1,356
1,505
101
112
Total debt
Deferred tax liability (net)
703
595
875
970
Total liabilities
110
212
202
297
330
Assets
392
-
577
-
392
Net fixed assets
640
-
577
C apital WIP
Total fixed assets
640
FY13E
2,579
162
24
FY12E
686
Operating PBT
Exceptional inc/(exp)
FY11E
2,287
Interest
Other income
FY10
Liabilities
Investments
Current assets
Ratios
FY09
FY10
FY11E
(3.9)
15.5
36.1
FY12E
FY13E
Growth
Operating income (%)
8.9
11.0
Loans and advances
377
356
549
599
665
C ash & bank balance
127
167
1,264
1,394
2,066
EBITDA (%)
(21.8)
54.9
(3.2)
28.6
8.0
Adj PAT (%)
(88.8)
743.6
(16.0)
47.1
10.9
Total current assets
1,773
2,839
4,414
4,827
5,876
Adj EPS (%)
(88.8)
743.6
(16.0)
47.1
10.9
Total current liabilities
1,612
2,582
3,568
3,824
4,257
160
257
846
1,003
1,619
21
11
11
11
11
3,477
3,648
4,636
5,065
5,541
FY11E
FY12E
FY13E
Marketable securities
Net current assets

Profitability
EBITDA margin (%)
Intangibles/Misc. expenditure
8.8
11.8
8.4
9.9
9.6
Total assets
Adj PAT Margin (%)
0.8
5.8
3.6
4.8
4.8
RoE (%)
1.9
15.0
11.5
15.3
15.1
Cash flow
RoC E (%)
12.4
21.3
16.2
18.9
18.8
(Rs mn)
FY09
FY10
RoIC (%)
10.0
15.6
14.7
23.7
25.6
Pre-tax profit
166
679
595
875
970
Total tax paid
(24)
(208)
(202)
(297)
(330)
Depreciation
230
260
301
329
340
(57)
508
(26)
Valuations
Price-earnings (x)
27.2
9.8
8.7
5.9
5.4
Working capital changes
0.5
1.4
1.0
0.9
0.8
Net cash from operations
EV/EBITDA (x)
2.6
4.7
3.2
2.4
1.6
Cash from investments
EV/Sales (x)
0.2
0.6
0.3
0.2
0.2
148.5
48.1
20.5
20.5
20.5
7.8
5.2
2.3
3.4
3.8
Price-book (x)
Dividend payout ratio (%)

Dividend yield (%)
C apital expenditure
Investments and others
Net cash from investments
64
436
674
(809)
(334)
(809)
1,201
(700)
-
(334)
879
55
1,035
(600)
(200)
(700)
(600)
(200)
Cash from financing

B/S ratios
Equity raised/(repaid)
Inventory days
35
77
51
52
52
C reditors days
82
116
113
113
113
Debtor days
35
41
40
Gross asset turnover (x)
1.9
1.8
Net asset turnover (x)
3.2
3.0
Sales/operating assets (x)
2.3
C urrent ratio (x)
1.1
Debt-equity (x)
Debt raised/(repaid)
Dividend (incl. tax)
149
10
(126)
690
(10)
(10)
(118)
(236)
(94)
(139)
(154)
40
40
Others (incl extraordinaries)
24
(12)
(11)
Net cash from financing
65
2.2
2.1
2.2
C hange in cash position
3.7
3.6
3.9
C losing cash
2.4
3.1
3.1
3.3
1.1
1.2
1.3
1.4
Quarterly financials
0.1
0.0
0.2
0.2
0.2
(Rs mn)
Net debt/equity (x)
0.0
(0.0)
(0.1)
(0.2)
(0.3)
Net Sales
Interest coverage
1.7
50.7
14.0
10.5
11.7
C hange (q-o-q)
Working capital days
(5)
EBITDA
Per share
(149)
(164)
40
1,097
131
671
167
1,264
1,394
2,066
Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11

2,059
16%
191
2,583
25%
241
2,246
-13%
248
2,812
2,840
25%
1%
144
248
C hange (q-o-q)
-31%
26%
3%
-42%
72%
EBITDA margin
9.3%
9.3%
11.1%
5.1%
8.7%
Adj EPS (Rs)
0.4
3.4
2.9
4.2
4.7
PAT
129
114
126
44
99
C EPS
2.1
5.3
5.0
6.6
7.1
Adj PAT
129
114
126
44
99
21.7
23.8
26.0
29.2
32.7
0.9
1.7
0.6
0.9
1.0
137.3
137.3
137.3
137.3
137.3
Actual o/s shares (mn)
FY13E
596
FY10
Dividend (Rs)
FY12E
127
62
(300)
FY09
Book value
FY11E
(308)
C hange (q-o-q)
-20%
-12%
11%
-65%
125%
Adj PAT margin
6.3%
4.4%
5.6%
1.6%
3.5%
0.9
0.8
0.9
0.3
0.7
Adj EPS
Sou rce: CR ISIL Equ it ies

Focus Charts
Changing revenue mix
Revenue and growth trend

(Rs mn)
100%
90%
13.1%
0.7%
0.8%
13.2%
0.6%
35.3%
32.5%
13.4%
10.6%
0.0%
10.0%
0.0%
9.1%
0.0%
33.2%
34.1%
33.3%
35.5%
36%
30%
10,000
15%
60%
10%
6,000
40%
20%
20%
11%
9%
8,000
50%
30%
40%
12,000
80%
70%
39%
14,000
50.7%
56.2%
53.8%
50.5%
56.0%
57.5%
-4%
0%
4,000
-10%
2,000
10%
7,285
6,999
8,083
11,003
11,983
13,302
FY08
FY09
FY10
FY11E
FY12E
FY13E
-20%
0%
FY08
FY09
Pig iron
FY10
Castings
FY11E
FY12E
Investmen tcastings
FY13E
Others
Revenues
Y-o-Y growth (RHS)
EBITDA and PAT margin trend
RoE and RoCE trend

25%
12.0%
10.0%
20%
8.0%
15%
6.0%
10%
4.0%
5%
2.0%
0%
0.0%
FY08
FY09
FY10
FY11E
EBITDA margin
FY12E
FY08
FY13E
FY09
FY10
FY11E
ROE
PAT margin
FY12E
Quarterly sales and EBITDA margin trend
Shareholding pattern over the quarters
(Rs mn)
100%
3,000
20%
15.7%
2,500
12.0%
8.7%
9.3%
1,500
2,840
2,812
2,246
2,583
2,059
1,769
1,659
1,492
-7.1%
80%
10%
70%
Q3FY11
Q2 FY11
Q1 FY11
Q4 FY10
Q3 FY10
Q2 FY10
Q1 FY10
Q4 FY09
Sales
EBITDA margin (RHS)
60%
34.6%
34.1%
33.5%
33.5%
6.3%
6.8%
7.5%
7.5%
59.1%
59.1%
59.0%
59.0%
Mar-10
Jun-10
50%
0%
40%
-5%
30%
-10%
Q3 FY09
90%
15%
5%
5.1%
1,534
500
11.1%
9.3%
12.7%
2,000
1,000
FY13E
ROCE
20%
10%
0%
Promoter
FII
Sep-10
DII
Dec-10
Others
CRISIL Independent Equity Research Team

Mukesh Agarwal
Director
+91 (22) 3342 3035
magarwal@crisil.com
Tarun Bhatia
Director, Capital Markets
+91 (22) 3342 3226
tbhatia@crisil.com
Chetan Majithia
Head, Equities
+91 (22) 3342 4148
chetanmajithia@crisil.com
Sudhir Nair
Head, Equities
+91 (22) 3342 3526
snair@crisil.com
Nagarajan Narasimhan
Director, Research
+91 (22) 3342 3536
nnarasimhan@crisil.com
Ajay D'Souza
Head, Research
+91 (22) 3342 3567
adsouza@crisil.com
Aparna Joshi
Head, Research
+91 (22) 3342 3540
apjoshi@crisil.com
Manoj Mohta
Head, Research
+91 (22) 3342 3554
mmohta@crisil.com
Sridhar C
Head, Research
+91 (22) 3342 3546
sridharc@crisil.com
CRISILs Equity Offerings

The Equity Group at CRISIL Research provides a wide range of services including:
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Valuation on companies for use of Institutional Investors, Asset Managers, Corporate
Other Services by the Research group include

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Kirloskar Ferrous Industries Ltd

Enhancing investment decisions

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

Strong upside (>25% from CMP)

Upside (10-25% from CMP)

Align (+-10% from CMP)

Downside (negative 10-25% from CMP)

Strong downside (<-25% from CMP)

Polaris Software Limited

5/5 (CMP has strong upside)

February 21, 2011

Long-standing relationship with OEMs; castings volume up by 10.2%

Backward integration to lower costs as well as improve productivity

KEY STOCK STATISTICS

In a cyclical industry, exposed to input cost fluctuations

Free float (%)

Face value (Rs per share)

Market cap (Rs mn)/(US$ mn)

52-week range (Rs) (H/L)

Avg daily volumes (30-days)

Avg daily value (30-days) (Rs mn)

Adj Net income

Shares outstanding (mn)

Valuations the current price has strong upside

CMP: Current Market Price

PERFORMANCE VIS--VIS MARKET

Client servicing desk

Sou rce: Com pan y, CR I SIL Equ it ies est im ate

Kirloskar Ferrous Industries Ltd

Manufacturing facility in Hospet,

Manufacturing facility in Hospet, Karnataka and Solapur,

Caters to all regions except eastern India

Tractor industry to grow at CAGR of 9% over five years

(FY07-FY10 3-yr CAGR)

The government's increased focus on agricultural sector and infrastructure development

Tata Metaliks, Sathavahana Ispat,

Tata Metaliks, Hinduja Foundries, Nelcast, Carnation

Visa Steel, Usha Ispat, Sesa Goa,

Industries, Simplex Castings, Nelcast, Magna Electro

Neco, Dempo, KISCO

Castings, Ghatge Patil, Amtek, Ashok Iron works

(Kudremukh), SLR Steel

Client concentration in castings business (M&Ms tractor segment)

Kirloskar Ferrous Industries Ltd

The castings industry

Figure 1: Pig iron demand grows at 10% CAGR

Figure 2: Break-up of pig iron end-user demand

(in 000 tonnes)

Source: CRISIL Research

Source: CRISIL Research

Backward integration to cut costs

% of iron ore lumps

Market price of iron ore lumps (Rs per tonne)

Market price of iron ore fines (Rs per tonne)

Cost saving (Rs mn)

Sou rce: Com pan y, CR I SIL Equ it ies

Kirloskar Ferrous Industries Ltd

and improve productivity

Figure 3: Pig iron volumes to grow at CAGR of 6% (FY10-FY13)

Source: CRISIL Equities

60% of coke consumed

is imported, the balance